Company Restoration in the “New Normal” – Not Restructuring, but Restoration
By: Guest Writer Donald H Turner, Serial Turnaround and Growth Executive
In Part 1, we identified some of the more important characteristics that will be driving the New Normal. In this discussion we will focus on how business professionals should be looking to respond to the New Normal.
First and foremost, it is clear that many companies are and will be faced with survival, pure and simple, doing whatever they can do today to ensure they are in business tomorrow. This is a reality that must be dealt with. Some will make it, many won’t.
That aside, if the company has enough ‘liquidity runway’ to reenter the marketplace than the question is how? As we return to the world of commerce, it will be clear to all involved that is not going to be business as usual.
Given the current situation, the natural tendency is to turn to the methods that fall under the topic of “Turnaround” or “Restructuring” in an attempt to return a company to prosperity. Even so, I believe we will quickly find that these traditional ways of fixing organizations are insufficient. I believe these Restructuring/Turnaround approaches must be modified and evolved to reflect the realities of conducting business in the New Normal.
To differentiate this new perspective, I’m suggesting that conducting commerce in the New Normal will require a Restoration Strategy mindset. We aren’t simply restructuring companies; we are restoring them to on-going entities. We are not ‘turning around’ companies either, we are restoring their business models modified for the realities of the New Normal. Restoration will require answering questions, developing approaches, and executing tactics that have never been part of a typical Restructuring or Turnaround efforts.
I’m suggesting that the fundamental difference between Restructuring and Restoration will be the underlying environment. In a Restructuring situation the company itself is distressed. In a Restoration environment not only the company, but it’s marketplace, customers, suppliers, lenders, and everyone else, are distressed also. This extra level of calamity will force us to conduct commerce in entirely new ways with new levels of focused cooperation.
To understand the concept of Restoration, which builds on Restructuring and Turnaround methodologies, let’s make sure we understand what is typically involved with the Restructuring/Turnaround.
Please note, we are taking the concept of “Workout” out of the equation here. In my distressed company Lexicon, a “Workout” is when a company is already in or close to some form of receivership and it is likely no longer a going concern. In this case, the focus is working with banks and creditors to maximize asset monetization. Workouts in the New Normal will clearly be common, but the focus of this article is with businesses that have the potential to restore themselves and prosper.
In contrast – as someone who has been involved in a few turnarounds over the years – I view a Turnaround as a situation where the company is distressed and clearly in trouble but there is a possibility of fixing it and making it a healthy, growing organization again. I would be the first to admit that it doesn’t always end that way, but the difference is the intent going in. That intent drives what you immediately do in a Turnaround situation.
As a common discussion point, let’s all reacquaint ourselves with Turnaround 101 by discussing the four major stages, as shown in the following exhibit:
Stage 1 – TRIAGE – this first stage is the most critical and essentially represents a GO or NO GO decision.
You must quickly assess the company in terms of liquidity, resources, operations (ED: processes), and its marketplace. Note: some turnaround efforts ignore an effective look at the marketplace and after fixing the company find out that it should not have been fixed in the first place because of an unattractive market based on size, growth, competitors, profitability, etc. – i.e., remember to look at the external marketplace during Triage. Back to this initial assessment, you are trying to answer the question, “do I have something worth saving as a going entity?” Your focus is on items such as: liquidity, burn rate, and customer communication (i.e., retention). Bottom line, you are focused at ‘stopping the bleeding.’ Further, what is often not realized is that in this early stage of Triage, you must simultaneously start developing a vision for the future of the company that can be communicated to customers and stakeholders (i.e., employees, board, investors, creditors).
Stage 2 – STABILIZE – this second stage is focused at creating consistency and predictable operations, particularly in terms of burn rate. That is, Revenue less Expenses on a cash basis. One of the fundamental tenets of Japanese Total Quality Management developed back in 1954 is that to “fix something, you must do whatever you are doing, no matter how badly you are doing it, in a consistent manner.” When starting your fixing, your initial focus is outward looking, repairing and improving any and all customer-facing activities such as product quality and delivery. At the same time, you communicate to customers the actions you are taking to assure them of the company health and ongoing vitality. Internally, you concentrate on those items in the “Delivery Cycle.” Specifically, sales, delivery, and customer service. Generally, these can all be fixed relatively quickly. As the Delivery Cycle is stabilized you can then later turn your attention to the “Development Cycle” that includes marketing, development, and engineering (ED: this latter cycle has a slower velocity, or cycle time, and requires more time to change). In stabilizing the company, your greatest focus is on those items that can make an immediate, positive impact on cash, customers, and delivery. During this stage you also begin communicating the vision that was developed in Stage 1 to customers, shareholders, and employees. Particularly with employees in a typical distressed situation your best employees most likely already have their Resumes “on the street.” Therefore, you must encourage your top employees to stay and embrace the vision.
With Vision there is clarity of purpose. Without Vision there is chaos of existence.
Stage 3 – PROFITABILITY – If you have effectively stabilized the company to some form of consistency than the next stage is focused at profitability, generating EBITDA and a cash stream that ensures sustainability. There are countless techniques Turnaround professionals use, dependent upon the situation, but some of the more obvious ones might include: product line rationalization, customer attractiveness prioritization, revenue-generating customer service, alternative delivery approaches, cycle time reduction, and product testing improvement (product quality may take longer). At this stage you are also starting to work the “Development Cycle” including the product roadmap for new offerings that might be more attractive to your customers. At this point you have an accepted concern and your next focus is how to put the company on a healthy growth track. Jim Cichanski, the CEO of Flex HR, states, “I had the privilege of working with Don on a turnaround where he was brought in when the company was running at a $27 million a year loss annually. In one year after setting goals and applying the above strategy to get this company profitable, this organization was able to reduce operating losses to less the $2 million in a one-year period.”
Stage 4 – GROWTH – with a working, profitable, concern you are now looking more strategically to the future in terms of markets and offerings. You are addressing questions such as: “Do I have the right offerings and business model for my current market”; “What else can I sell to my current Customers”; “Can I use my offerings or core competencies to expand to other markets” – i.e., generating new Customers. Generally, most of these questions all fall under the auspices of the Ansoff Matrix, which represents an effective framework for identifying growth and risk opportunities. I have used this framework dozens and dozens of times to help identify, evaluate, and select growth initiatives for an organization. The final big question is “What company focus, or strategy will generate the maximum return for the Investors?”
These are the basic stages of a typical Turnaround. Given the many possible problems and the many possible solutions, Turnaround approaches are almost always modified as needed for a specific distressed situation.
How is Restoration Different?
What is different about a Restoration versus Restructuring as it relates to the New Normal? The actual stages of a Restructuring remain the same, but the underlying conditions are significantly more formidable, creating greater requirements and likely entirely new requirements to successfully restore the company to a healthy status. You can think about these requirements in four major categories: 1. Environment; 2, Personnel; 3. Liquidity; and 4. Emotional Intangibles. I am sure we could address more, but let’s focus on these for now.
- Environment. As mentioned, in a typical Turnaround the company is in a distressed state, whereas in the New Normal almost every business surrounding the company will be in some form of distressed state because everyone is in the same boat.The good news is that everyone around the table will be acutely more focused and amenable to “making something happen.” This reminds of the quote from the 18th century English writer, Samuel Johnson, who said;
“Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”
The environment in the New Normal will be characterized as a fierce determination to survive that will force business professionals to develop and consider new approaches to keeping their business alive – particularly through the early stages of the New Normal. Expect less long-term relationship development – “survival timing” simply won’t allow. Discussions between marketplace partners will be one of “putting your cards on the table” and asking “what can we make happen between us that will be a win-win?” Golf course discussions will become lifeboat discussions.
- In a normal Turnaround situation, your best employees have ample opportunity to go elsewhere – that is why they are your best. However, in the New Normal their prospects of leaving are diminished, which is the good news. The bad news is the increased challenge to motivate people when they feel they are trapped. That said, I envision this as an opportunity to build an esprit de corpsin your company culture like never before. In our next installment where we discuss culture, we’ll explore this a bit more. Suffice it to say that the New Normal will create the potential environment where coworkers become akin to ‘battle buddies’ and all that implies. Ask anyone who has been in armed conflict about this significance. An important point is that leading battle buddies will require a far more effective leadership than supervising coworkers.
- In the New Normal everyone has limited liquidity, not just you but your customers, your suppliers, your lenders, etc. Everyone wants to conduct business; however, everyone also has limited buying power to purchase goods and services. Surviving and then prospering – relatively speaking for at least the short-term – in the New Normal will require creative ways of using limited capital to conduct business. I fully envision the barter system to be resurrected for certain types of transactions, particularly in the service sector, as well as creative consignment approaches for getting product in front of potential buyers. Payment terms will have to be negotiated almost simultaneously along the entire supply chain.
- Emotional Intangibles. By their very nature, normal Restructuring efforts place tremendous stress on everyone in the business. Be that as it may, in Restoration under the New Normal, we can expect a higher level of emotional stress throughout the organization than we have ever seen before. The options we face under the New Normal are limited and with reduced options comes an accompanying realization that this is truly a “do or die” situation. Decision makers will agonize over their choices more than they ever have, as will everyone in the organization whose livelihood is impacted by those decisions.
As we can see, these underlying factors of the New Normal will place tremendous pressure on every business professional to get creative. I believe one positive outcome (and I actually think there will be many) of these pressures is for a greater level of transparency in transactions between parties. The urgency of restoring a business in the New Normal simply will not allow for the typical games often found during the sales and negotiating activities.
In many ways, Restoration of companies in the New Normal can be viewed as Restructuring on steroids.
What should businesses do in trying to respond to the New Normal? In Part 3 we’ll discuss some thoughts about specific actions.
* Information contained on this page is provided by Donald H. Turner, an independent third-party content provider. Flex HR makes no warranties or representations in connection therewith.
Flex HR specialists serve thousands of different organizations, in countless industries, with company sizes varying from a few to over 75,000 employees. They offer many levels of services including HR consulting, outsourcing (HRO), compliance, recruiting & talent acquisition, training & development, and onboarding administration.
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* Statistics and government guidance are rapidly changing. This is the most updated information as of the morning of 4/24/20. Small business is defined as under 500 employees.